Česká národní banka

Minutes of the Board Meeting on 25 August 2005

Present at the meeting:

Z. Tůma (Governor), L. Niedermayer (Vice-Governor), M. Singer (Vice-Governor), M. Erbenová (Chief Executive Director), J. Frait (Chief Executive Director), P. Řežábek (Chief Executive Director)

The Board discussed the August situation report, which analysed the new information and assessed the risks associated with the fulfilment of the July forecast.

The July annual inflation figure of 1.7 % had been 0.3 percentage point lower than predicted by the current forecast. The deviation had been due to slower growth in adjusted inflation excluding fuels and a faster fall in food prices. The increase in administered prices had also been rather less than forecasted. Conversely, fuel prices had risen more quickly. The latest data concerning industrial producer prices and import prices suggested slightly higher figures by comparison with the forecast. Agricultural producer prices in July had been pretty much in line with the assumptions of the forecast.

The newly published figures on supply side developments and foreign trade indicated no major risks to the fulfilment of the forecast, which expects second-quarter GDP growth close to 4 %. The lower-than-forecasted investment activity might have been offset by better balance of trade figures. Unemployment was in line with the forecast, but the wage developments in industry and construction suggested slightly lower wage growth in the enterprise sector.

After the presentation of the situation report, the Board discussed the risks to the fulfilment of the July forecast. There was broad agreement that the risks could be viewed as moderate and balanced. The Board's discussion covered several topics.

The high oil prices and the expected evolution of administered prices constituted a short-term inflationary factor. It was also said that in the medium term there might be some transmission of cost pressures to prices via wages. On the other hand, it was said that the high oil prices could pose a risk to external economic growth. Likewise, higher growth in administered prices could lead to weakening domestic demand in other segments of the domestic economy.

The Board discussed the evolution of investment and its potential implications for the economy going forward. Lower investment growth relative to the July forecast could be expected in the second quarter, chiefly as a result of a slowdown in private investment. Public sector investment was showing relatively dynamic growth. Weaker private investment coupled with a lower inflow of foreign direct investment could indicate a weakening of the supply side of the economy. The hypothesis was expressed that the weakening of private investment may be associated with rising competition in the global economy and a gradual loss in the Czech Republic's relative competitiveness. It was repeatedly mentioned that the future investment attractiveness of the Czech economy was linked, among other things, with the development of the domestic business environment and the degree and manner of regulation by the state.

Considerable attention was paid to the balance of payments, which was repeatedly described as an important factor for the formation of exchange rate expectations. In the past, those expectations had often been derived from current account developments. However, the financial account was steadily growing in relevance. Its evolution would be increasingly dependent on reinvestment. The Board agreed that no fundamental appreciation pressures on the exchange rate were apparent from the balance of payments outlook.

The Board discussed the issue of drawing of EU funds. The current figures indicated a very low level of drawing. However, attention was drawn to the existence of a lag between the start of project implementation and the drawing of EU money, which might be distorting the true situation.

The Board's discussion also covered the issue of wage bargaining. Concerns were raised that the expected growth in administered prices of gas and electricity might affect the wage bargaining for next year. The wage bargaining process was to take place in a new framework this year, as legal extensions of sectoral collective agreements had entered into force. It was said repeatedly that the CNB would closely monitor the wage bargaining process.

After discussing the situation report, the Board decided unanimously to leave the two-week repo rate unchanged at 1.75 %.

Author of the minutes: Vladimír Bezděk, Adviser to the Board

Please send any comments to the author at vladimir.bezdek@cnb.cz